WASHINGTON, Nov 16 (Reuters) - U.S. farm and ranch income
shriveled this summer during the worst drought in half a
century, according to three Federal Reserve regional banks that
oversee Farm Belt lending, with livestock producers hardest hit
as pastures withered and feed prices soared.

Even so, agricultural economists from the Fed banks say the
U.S. farm sector could post record high income this year. High
market prices and insurance indemnities will help compensate
grain producers for drought-shortened crops, a buffer that
livestock producers lack, they said on Friday.

The Federal Reserve's regional banks in Kansas City, Chicago
and St. Louis said red-hot land prices climbed further despite
the drought. In Nebraska, non-irrigated farm land values soared
by 30 percent from a year earlier. Iowa's values were up 18
percent and Illinois' up 15 percent.

"A lot of (farmers) think the future of agriculture is
promising and want to expand," said David Oppedahl, agricultural
economist at the Chicago Federal Reserve Bank, who said crop
farmers are flush with cash and, with interest rates low, see
few alternatives to land for investment.

The farm sector has enjoyed boom times since 2006, when the
world entered an era of tight supplies and high but volatile
commodity prices.

GRAIN FARMERS GAIN, FEED PRICES HURT LIVESTOCK

In quarterly newsletters, the regional banks described the
financial impact of drought on farmers.

The Kansas City Fed cited a sharp decline in third-quarter
farm incomes "as escalating feed and fuel prices pushed
production costs higher," while the St Louis Fed said "farm
income and capital spending were down significantly in the third
quarter."

The Chicago Fed forecast higher feed costs will drive down
cash earnings this fall and winter for dairy, cattle and hog
producers from a year ago. Crop farmers, in contrast, may
actually make more money, it said.

In August, the Agriculture Department forecast record
farm-sector income this year, up 3 percent from 2011.

High market prices and crop insurance would offset the
losses from "extreme heat and dryness in the Plains and Corn
Belt," it said, even as livestock costs climb. USDA is
scheduled to update its forecast on Nov. 27.

Record farm income is within reach although the U.S. corn
crop is the smallest since 2006 and soybeans the smallest in
four years, said Pat Westhoff of the Food and Agricultural
Policy Research Institute.

Market prices are so high that revenue to growers could
exceed 2011 despite smaller harvests, said Westhoff.

Corn and soybeans are the two most widely grown U.S. crops.
Futures prices for corn are up about 21 percent from a year ago
and soybean prices are up about 18 percent.

Feed prices are down somewhat from late-summer peaks, so the
stress on livestock producers is slightly less. Still, many hog
and dairy farmers face money-losing years.

"TWO TALES OF AGRICULTURE"

"Farm income (nationwide) still is expected to be strong,"
said Jason Henderson, head of the Omaha branch of the Kansas
City Fed. But it may be lower than 2011 in the six-state Kansas
City district, centered on the livestock and wheat-growing
central U.S. Plains.

"We have two tales of agriculture," said Henderson.

Record-high commodity prices give grain farmers the cash to
continue a land-buying spree that raised fears a year ago of an
unsustainable price bubble. At the same time, livestock
producers have to pay daunting prices for feed.

The St. Louis Fed said an Arkansas banker who took part in
its survey of agricultural conditions said farmers were culling
herds because of the drought and having to pay sky-high prices
for hay. An Illinois banker said livestock farmers who buy feed
rather than grow it themselves "will be hurt the most by this
year's drought."

Although irrigation would assure a harvest despite drought,
profits will be lower because of the cost of fuel to pump water,
said another Arkansas banker.

Oppedahl of the Chicago Fed said loan demand was up in
Wisconsin, the No 2 dairy state, where the flip side of high
crop prices was high feed prices and some farmers have had to
take out loans to stay afloat.

"You end up there with higher loan demand," he said. Land
prices in Wisconsin fell by 2 percent from July-September,
according to the regional bank's survey of lenders.